Section 2(f) of the Central Excise Act, 1944 defines the term ‘manufacture’. While dealing with the extended meaning of the term ‘manufacture’ the Supreme Court in ‘Shyam Oil Cake Limited V. Collector’ – 2004 (165) ELT 641 (SC) held that it is clear that the Legislature realized that it was not possible to put in an exhaustive list of various processes but that some methodology was required for declaring that a particular process amounted to manufacture. The language of the amended Section 2(f) indicates that what is required is not just specification of the good but a specification of the process and a declaration that the same amounts to manufacture. The specification must be in relation to any goods.
Many a case has arisen on interpreting the term ‘manufacture’ before the judicial authorities. It is trite to state that ‘manufacture’ can be said to have taken place only when there is transformation of raw materials into a new and different article having a different identity, characteristic and use. Manufacture implies a change, but every change is not manufacture and yet every change of an article is the result of treatment, labor and manipulation; a new and different article must emerge having a distinctive name, character or use.
It is well settled that mere improvement in the quality does not amount to manufacture. It is only when the change or a series of changes take the commodity to a point where commercially it can no longer be regarded as the original commodity but is instead recognized as a new and distinct article that manufacture can be said to have taken place. In ‘Tungabhadra Industries Limited V. Commercial Tax Officer’ – 1961 (2) SCR 14 the Supreme Court held that in the opinion of the Supreme Court the High Court laid an undue emphasis on the addition by way of the absorption of the hydrogen atoms in the process of hardening and on the consequent inter-molecular changes in the oil. The addition of the hydrogen atoms was effected in order to saturate a portion of the oleic and linoleic constituents of the oil and render the oil more stable thus improving the quality and utility. But neither mere absorption of other matter, nor inter-molecular changes necessarily affect the identity of a substance as ordinarily understood. The change here is both additive and inter-molecular but yet it could hardly be said that rancid groundnut oil is not groundnut oil.
In ‘Commissioner of Central Excise, Bangalore – II V. Osnar Chemical Private Limited’ – 2012 -TMI - 208472 – (Supreme Court of India) the respondent is engaged in the supply of Polymer Modified Bitumen (PMB). The respondent also supplies the Crumbled Rubber Modified Bitumen (CRMB) which is a different kind of modifier. The respondent entered into a contract with M/s Afcons Infrastructure Limited for supply of PMB at their work site. As per the agreement the base bitumen and certain additives were to be supplied by Afcons to the respondent at site where the respondent in the mobile polymer modification plant was required to heat the bitumen at a temperature of 160 degree C with the help of burner. To this hot bitumen 1% polymer and 0.2% additives were added under constant agitation, for improving the quality by increasing its softening point and penetration. The process of agitation was to be continued for a period of 12 to 18 hours till the mixture becomes homogenous and the required properties were met. The said bitumen in its hot agitated condition was mixed with stone aggregates which was then used for road construction. The resultant product was considered to be a superior quality binder with enhanced softening point, penetration, ductility, viscosity and elastic recovery.
The respondent is paying excise duty on the PMB processed at their factory but not paid the same for conversion don at the work site. A show cause notice was issued by the Department demanding duty in respect of PMB falling under the sub heading 271500.90 of the Tariff Act for the period from 18.08.2004 to 19.09.2006. The Commissioner adjudicated that the aforesaid process amounted to manufacture of PMB irrespective of the fact whether such process was carried out on their own account or on job work basis and therefore was dutiable.
The respondent filed an appeal before the Tribunal. The Tribunal set aside the order of the Commissioner. The Tribunal held that since PMB cannot be bought and sold in the market as it is fit for use only in a molten condition at a temperature around 160 degree C and resultantly cannot be stored unless kept in continuous agitated state at 100 degree C so as to avoid separation of polymer and bitumen; the process carried out by the respondent does not amount to manufacture. The Tribunal relied on the circular No. 88/1/87-CX.3, dated 16.06.1987 which clarified that a slight modification of the grade of quality of bitumen brought about by the process of air blowing to duty bitumen did not amount to manufacture.
The Revenue against the order of the Tribunal filed an appeal before the Supreme Court. The Revenue put forth the following arguments before the Supreme Court:
- Having regard to the nature of process involved, PMB and CRMB are different from bitumen;
- Ordinarily bitumen is heated to a temperature of 200 degree C, in the polymer modification plant; to this heated mixture, polymer is added and samples are taken, if the samples are found to be satisfactory, additives are added and the PMB is either stored or dispatched;
- The end product are different from bitumen and covered by the term ‘manufacture’;
- PMB and CRMB are commercially known in the market for being bought and sold and therefore, satisfy the test of marketability which is one of the essential conditions for the purpose of levy of excise duty;
- The Tribunal wrongly relied on the circular No. 88/1/87-CX.3, dated 16.06.1987 as it has been subsequently modified by Circular No. 88/1/88-CX.3, dated 01.07.1988 wherein the department has clarified that duty would be chargeable on the blown-grade bitumen.
The respondent submitted the following:
- Based on the documents, evidence and materials on record the Tribunal has found as a fact that the process of mixing an insignificant dose of polymer with duty paid bitumen only enhanced the quality of bitumen and did not amount to manufacture and therefore in the absence of plea of perversity, the findings of the Tribunal does not want interference by Supreme Court;
- A mere improvement in the quality did not amount to manufacture as manufacture takes place only when there is a transformation of raw materials into a new and different article having a distinctive name, character and use, which is not the case here as the end use of both the articles remained the same;
- Merely because bitumen and PMB are specified under two different headings, it cannot be presumed that the process of obtaining PMB automatically constituted manufacture, unless in fact there has been a transformation of bitumen into a new and different product or alternatively, the Section Notes or Chapter Notes created a deeming fiction by providing by an artificial or extended meaning to the expression ‘manufacture’ in respect of the goods in question;
- Even if it is assumed that the said process amounted to manufacture still PMB cannot be subjected to excise as it is not commercially marketable;;
- The burden to prove that the process in question constitutes manufacture and that the goods so manufactured are marketable as new goods, known to the market, lies on the revenue and the same has not been discharged in the present case;
The Supreme Court observed as follows:
- The expression ‘manufacture’ defined in Section 2(f) of the Act, inter alia includes any process which is specified in relation to any goods in the Section or Chapter Notes of First Schedule to the Tariff Act. It is manifest that in order to bring a process in relation to any goods within the ambit of Section 2(f) the same is required to be recognized by the legislature as manufacture in relation to such goods in Section Notes or Chapter Notes of the First schedule to the Tariff Act. Therefore in order to bring petroleum bitumen within the extended or deemed meaning of the expression ‘manufacture’ the process of its treatment with polymers or additives or with any other compound is required to be recognized by the legislature as manufacture under the Chapter notes or Section notes to Chapter 27;
- In the present case, a plain reading of the Schedule to the Act makes it clear that no such process or processes have been specified in the Section notes or Chapter notes in respect of petroleum bitumen falling under Tariff Item 27132000 or even in respect of bituminous mixtures falling under Tariff Item 27150090 to indicate that the said process amounts to manufacture. Thus it is evident that the said process of adding polymers and additives to the heated bitumen to get a better quality bitumen, viz., PMB or CRMB cannot be given an extended meaning under the expression manufacture in terms of Section 2(f) of the Act;
- There was no change in the characteristics or identity of bitumen and only its grade or quality was improved. The said process did not result in transformation of bitumen into a new product having a different identity, characteristic and use. The end us also maintained the same, namely, for mixing of aggregates for constructing the roads.
The Supreme Court, therefore, held that PMB or CRMB cannot be treated as bituminous mixtures falling under CSH 27150090 and shall continue to be classified under CSH 27132000 pertaining to tariff for petroleum bitumen.